Hey "Fence Sitters"--Why buying and selling NOW matter! The dangers of increasing of interest rates!

Hey "Fence Sitters"--Why buying and selling NOW matter! The dangers of increasing of interest rates!

Waiting to buy a home between now and even a few months from now can cause a buyer to incur thousands and even tens of thousands dollars in additional interest on a loan over time. While home prices are the highest they have been in years thanks to a rebounding economy, new buyers and sellers are losing a net benefit of this increase as a result of increasing interest rates. For example, in early May, interest rates were as low as 3.25% on a 30 Year Fixed. By the end of June, they were at 4.5%. If you were borrowing a $300,000 mortgage, that would equate to the following loss in payment in interest:

May 2013

Rate: 3.25%

Mortgage:$300,000

Principal and Interest: $1,305.62

Interest Paid over 1 Year:$9,750

June 2013

Rate: 4.5%

Mortgage:$300,000

Principal and Interest: $1,520.06

Interest Paid over 1 Year:$13,500

As you can see, the payment INCREASED by $215 a month. That is the equivalent of losing $50,000 in purchasing power/loan amount. That means that someone’s whose maximum sales price range of $300,000 can now only qualify for $250,000. On top of that, they cost themselves over $3,750 in additional interest per year. In 5 years, that’s almost an extra $20,000. In 10 years, that close to $40,000. So quite a lot over the life of a loan.

Even if prices somehow go back down, let’s say by $20,000, but interest rates still increase even by half a percentage, you’re still losing money over the net sales gain in price on a home versus extra cost in rate. So for example, see below:

June 2013

Rate: 4.5%

Mortgage:$300,000

Principal and Interest: $1,520.06

Interest Paid over 1 Year:$13,500

January 2014

Rate: 5%

Mortgage: $280,000

Principal and Interest: $1,503.10

Interest Paid over 1 Year: $14,000

The payment might be slightly smaller on the principal and interest, but your interest over the life of the loan is more. So you lose in the end even though you had a borrower less. You still paid more.

What this shows us is that as rates climb, in order for buyers to purchase in the higher price point categories ($300,000 and more), sellers are going to have to reduce their costs to bring more offers in the mix. On top of that though, when the seller goes to buy their new home, they are going to lose more out of their pocket because they are paying more interest over time. So the time to sell is now while the market is good and rates can still afford a few more buyers in that price range. Waiting for later can only cost sellers more in every part of the equation.